What Type Of Business Organization Is Best For You

 

 

Whether you are going it alone or with another person, it is best to consult a lawyer to determine which form of business organization will be best for you. Your choices and the attributes of each form are essentially as follows:

Sole Proprietorship: A sole proprietorship is one person alone. He will have unlimited liability for all debts of the business, and the income or loss from the business will be reported on his or her personal income tax return along with all other income and expense he or she normally reports (although it will be on a separate schedule). Although proprietorship avoids the expense for forming a partnership or corporation, many start businesses this way because they are unfamiliar with the other forms of organizations.

General Partnership: In a general partnership each of the two or more partners will have unlimited liability for the debts of the business. The income and expense is reported on a separate return for tax purposes, but each partner then reports his pro-rata share of the profit or loss from the business as one line on his personal tax return.

Limited Partnership: With a limited partnership, each of the general partners has unlimited liability for the debts of the partnership, but the limited partner's exposure to the debts of the partnership is limited to the contribution each has made to the partnership. With certain minor exceptions, the reporting for tax purposes is the same as for a general partnership.

Corporation: A corporation provides limited liability for the investors. Except as indicated below, none of the shareholders in a corporation is obligated for the debts of the corporation; creditors can look only to the corporation's assets for payment. The corporation files its own tax return and pays taxes on its income. If the corporation distributes some of its earnings in the form of dividends, it does not deduct the dividend in computing its taxes, but the shareholder recipients must pay taxes on those dividends even though the corporation has paid taxes on its earnings. A corporation has some tax benefits such as deductibility of health insurance premiums.

"S" Corporation: A corporation that has made an election to be an "S" Corporation for federal income tax purposes is treated as a partnership for tax purposes although it is treated as a regular corporation for other purposes.

Limited Liability: A limited liability company provides limited liability for all of its members, but typically can be treated as a partnership for federal income tax purposes. State laws may differ as to whether it is treated as a partnership or a corporation for state income tax purposes. It can be managed by all of the members or can have centralized management in one or more of the members.
Obviously there are variations in these rules and you should consult with your attorney and/or accountant in each specific case to determine what form of organization best fits your needs.

One of the things to consider in making the final decision is that although a corporation has limited liability for its shareholders, if the corporation does not have sufficient assets various creditors may insist on personal guarantees from the shareholders. Examples are your landlord, some suppliers, and, by law, liability for certain payroll taxes and liabilities to employees.

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